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Wednesday, 26 July 2017

How to calculate your ad budget?

Advertising is important, but before you pour all your money into spending for ads, you should figure out how much you should spend. Often a complex and abstract problem can be undone by wrapping step by step actions that move towards a working solution.



Remember this isn't a 100% sure fire guaranteed way to work for everyone, because advertising is an art more than an acquired technical competency. Know what you're spending on and have control over the actions to understand and adapt, and with technology this can be done quick - saving you time and investment dollars.

You must be wondering, this is the first time you are doing advertising and the thought of spending money with no guarantee of return scares you. Your business till this date has relied on networking and word-of-mouth. Big competition use ads frequently, and you have an inclination to try with a small ad campaign, but you worry that it will cost a lot of money.

Q: Where do I start?


A: The first thing you could do is to calculate your minimum and maximum budgets. What this does is by giving you a minimum and maximum limit for spending on your ads.


Step 1: 

Use 10% and 12% of your projected annual gross sales and multiply each by the markup made on your average transaction. The formula is as follows below:

Minimum budget = 10% of projected annual gross sales x markup made on average transaction
Maximum budget = 12% of projected annual gross sales x markup made on average transaction

Important note: Do not confuse markup with margin. In our calculation we use gross markup and not margin. For example: You sell a t-shirt for RM 150 and your cost is RM 100 your markup would be 50% (1-[150/100] = 0.5). Your margin, however, is only 33.33% (50/150 = 0.3333). Most retail stores carry a markup of approximately 100%, but more expensive products and services typically only carry a markup of only 10% to 15%.

Step 2: 

Deduct your rent from both the minimum and maximum budget.

Step 3: 

The remaining minimum and maximum budget represents your allowable amounts for the year.

At the end of this step you might have learnt that you've spent your ad on expensive rent or that you should have done a lot more advertising.

Here's a working example so you can grasp the concept above:


Assume that my business is projected to make RM 1,000,000 in sales this year, I have a profit margin of 25% and my rent is RM 30,000 per year (RM 2,500/mth x 12 mths). The first thing to do is is calculate 10% and 12% of gross projected sales, which is RM 100,000 and RM120,000 respectively.

Second, we must convert margin to markup. RM 250,000 is gross profits (25% x RM 100,000) and the cost incurred to the business is RM 750,000 (RM 1,000,000 - RM 250,000). Dividing the gross profits by the cost incurred to the business we are able to find that the markup would be 33.33% (RM 250,000 / RM 750,000 = 0.3333).

Finally, we multiply both 10% and 12% projected gross sales with the markup to see our adjusted  minimum and maximum ad spend budget, which is RM33,330 (RM 100,000 x 33.33%) and RM 39,996 (RM 120,000 x 33.33%) respectively. From these two budgets we must then adjust for rent leaving us with the final adjusted minimum and maximum ad spend budget of RM 3,330 and RM 9,996 respectively.

Most advertising / sales reps will sale put a ballpark figure of 5% to 7% of gross sales to be the "correct" amount for advertising, but don't believe it. It isn't possible to put a 1 size shoe fits all percentile without taking into consideration the markup on your average sale and cost of rent.

Reasoning can be placed that an expensive rent can be translated as good visibility in a good location, requiring less advertising compared to an affordable location. This is fair judgment and should be weighed against the calculation above to justify rent as a form of advertising.

The formula above is a metric I use to measure how the business should prepare its overall ad spend budget and taking into consideration the markup and rent expenses it will incur. Good luck! :)

Once you've worked out your ad budget pull your campaign together. Here are some additional resources to give you inspiration on how to move forward How to run a SMS Campaign for you restaurant and How to conduct a SMS Giveaway.

If you're looking for a partner for SMS Marketing drop us a mailer.

 
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